I. Unprecedented pressures create a window for opportunity
It is the defining crisis of our generation: climate change. It is a race we are losing but a race that can be won.Footnote 1 Bold steps are necessary to address this threat to humankind, which is recognised both on a global levelFootnote 2 and at the level of the EU.Footnote 3 Needless to say, taking action against climate change is burdensome, expensive, and requires sacrifice. Yet, the cost of not acting is tremendously higher. As tax law scholars, we feel called upon to enrich the discussion and increase the portfolio of tools that policymakers have at their disposal. For this purpose, we aim to work out a model that may be used to raise additional money to finance necessary climate change spending.
The urgency of the need for action is displayed by recent figures predicting that the EU is about to miss its self-imposed Fit for 55 goals of a 55 per cent reduction, relative to 1990 levels, of net greenhouse gas emissions by 2030 and climate neutrality by 2050.Footnote 4 European projections indicate that, even with the additional policies and measures that Member States intend to launch in the coming years, only a 41 per cent reduction will be achieved by 2030.Footnote 5 What is needed to turn this trend around is an increase in the carbon price.Footnote 6 Furthermore, it needs a substantial increase in green investments; estimates suggest that merely to ensure achieving the Fit for 55 goals requires a yearly additional green investment of around EUR 520 billion until 2030.Footnote 7 Apart from this necessary increase in green investments to achieve the Fit for 55 goals, another EUR 300 billion are to be mobilised between 2022 and 2030 for the REPower Plan that aims to end the EU’s dependence on Russian fossil fuels.Footnote 8 Thus, the amount of money to be raised is enormous. Reaching these investment goals requires a maximal effort, both on a national and on a European level.Footnote 9 Particularly the latter is regarded to be an integral part of the solution. PolicymakersFootnote 10 and academics are calling for a coordinated EU approach, emphasising the decisive advantages that lie in the creation of climate-related European public goods.Footnote 11 They should be able to address the issue of limited returns on individual action in tackling the climate emergency. Furthermore, they should enhance spillovers, improve coordination through cross-border investments, and safeguard the occurrence of investment despite possible national political or fiscal constraints.Footnote 12 Our article is to add precisely here.
The starting obstacle to the creation of European public goods is the EU’s financial architecture. As we will outline in more detail later, it gives rise to the – well-known – juste retour problem,Footnote 13 which goes hand in hand with Member States preferring the maximisation of measurable backflows into their territory, instead of maximising the European value created.Footnote 14 For rather obvious reasons, this is problematic, particularly in the area of climate policy. Climate change does not stop at the border. Accepting this, the EU and its Member States also rely on a common climate policy – the EU Climate Law including the Fit for 55 goals. Their achievement is legally binding for the EU and, furthermore, represents the EU’s and the Member States’ commitment to the Paris Agreement.Footnote 15 Yet, putting these general policies into practice is politically rather difficult because it means, as far as green investment is concerned, that the allocation of funds does not follow distributional criteria; rather, it is oriented only by the maximisation of positive environmental impact for the achievement of the common Fit for 55 goals.Footnote 16 This can mean that investments are concentrated in certain sectors and/or Member States in which these green investment needs – and their marginal benefits – are larger. Furthermore, it can mean financing pan-European measures that do not have a specific connection (and backflows) to the Member States.Footnote 17
In reaction to this problem, there have been various proposals made in the literature for EU climate finance facilities.Footnote 18 They are important. Yet, given that they rely on debt financing and/or financing through the EU budget – and, thus, possibly, after all by the Member StatesFootnote 19 – it is expectably politically challenging to set them up. This is particularly so in the current uncertain economic and geopolitical situation and considering the diminished fiscal capacity of states, which have, in light of the recent series of crises, increased their public debt levels.Footnote 20 As such, we intend to add to this overall endeavour a further mechanism that is not debt-financed or financed by the EU budget and that can serve as a further element in the obtaining of additional finance for climate-related European public goods. With regard to the recommendation made by staff of the European Central Bank (ECB) to raise EUR 500 billion over the years 2024–30 to cover the European share in additional public green investment needed for achieving the Fit for 55 goals,Footnote 21 our proposal will not raise enough money. However, it would diminish the overall amount of climate-related European public goods that have to be funded otherwise.
Against this background, we have developed a model that should safeguard, or at least promote, a certain type of climate-related European public goods, which are pan-European green investments. Other than EU initiatives to boost green investment in certain Member States in particular need of it, the financing of pan-European investment projects is more difficult to base explicitly on solidarity – which is a core value of the EU.Footnote 22 Rather, it is about the structural improvement of the Union’s environmental performance. This calls, as we will work out in more detail later, for arranging the finance structure differently towards demanding contributions not by Member States and/or future generations but by those that benefit from the internal market and the possibilities it gives: pan-European businesses.
For this purpose, and based on the legal precedent of the Single Resolution Fund (SRF) used in the banking sector, we have developed the FINE-for-EU mechanism, the name of which stands for ‘Financial Instrument for New pan-European Environmental Undertakings’.Footnote 23 At the core of it stands the Pan-European Climate Fund, which is owned and managed by a Pan-European Climate Board. In aiming to fulfil predefined yearly funding goals, it collects money from businesses in scope and uses the funds to invest in pan-European green investment projects. The contributions levied will have a connection to the behaviour of the covered businesses and, thereby, give a possibility for steering.
To lay the groundwork for our model, we will first give a brief overview of the EU’s climate policy and its shortcomings. Thereafter we will discuss the EU’s financial architecture, which will reveal that, to achieve the above-mentioned goals, a solution outside the EU budget is necessary (Section II). Thereupon, we will develop the FINE-for-EU model. After a short discussion of the SRF serving as the legal precedent (Section III.A), we will elaborate on the scope of the measure and bring forward various arguments that speak in favour of filling the fund through imposing a levy – we call it a climate contribution – on multinational entities (MNEs) (Section III.B).Footnote 24 This will be followed by thoughts on the calculation and distribution of the payment obligations (Section III.C). Having set this broad framework, we will provide further considerations on the various incentives that the model provides for the involved stakeholders (Section III.D). This will be succeeded by an elaboration on whether the legal basis for this measure may be Article 192(2) of the Treaty on the Functioning of the EU (TFEU) on requiring unanimity or Article 192(1) on foreseeing the ordinary legislative procedure, which is, not least, a crucial question with respect to implementability (Section IV).Footnote 25 In Section V, we will discuss how the FINE-for-EU mechanism connects to other climate-related financing mechanisms.
II. Setting the scene
A. EU climate policy and its shortcomings
There is a wide range of national and EU measures that aim to address climate change. On the one hand, there are regulatory policies that set certain prohibitions, standards, or further requirements. The rationale of this command-and-control approach is, in essence, steering by legal obligation.Footnote 26 On the other hand, climate policies can involve financial incentives and disincentives. This field of policy comprises measures that increase the price of emissionsFootnote 27 as well as measures that cut back on environmentally harmful policies.Footnote 28 In addition, there is the instrument of public spending for mitigating climate change.Footnote 29 Achievement of the Fit for 55 targets particularly needs a significant increase in public spending as well as in the carbon price.Footnote 30
Concerning the latter, that is, the carbon price, the EU has been increasingly active. The long-standing Emissions Trading System (ETS)Footnote 31 will grow its impact through the gradual phase-in of the Carbon Border Adjustment Mechanism (CBAM)Footnote 32 and the corresponding gradual phase-out of the free allowances granted under the ETS in certain sectors.Footnote 33 In addition, the EU has implemented the ETS 2 system, which covers the CO2 emissions from fuel combustion in buildings, road transport, and some small industry sectors not covered by the existing EU ETS.Footnote 34
Yet, the so-called carbon price gap – which compares the percentile distribution of the actual carbon rate with a benchmark of EUR 60 per ton of CO2Footnote 35 – is still too high in many countries,Footnote 36 which means that, with respect to the economy as a whole, the carbon price is too low. In part, this is explained by the fact that environmental taxation as such is rather small, with its share of the overall revenue from tax and social contributions in the EU being only 5.4 per cent in 2020.Footnote 37 Explicit carbon taxes are not very proliferated in the EU,Footnote 38 and the revenue raised by them is low.Footnote 39 On the other hand, also within states, the taxation of emissions is not uniform, but some emissions are subject to higher and some are subject to lower carbon taxation.Footnote 40 With regard to the fact that taxes on emissions are seen as a particularly powerful policy instrument,Footnote 41 this may be surprising at first sight. Yet, it is a well-known phenomenon that environmental taxes are inherently unpopularFootnote 42 despite the vast majority of people perceiving climate change as a serious problem.Footnote 43 This aversion is partly grounded on people simply not liking to pay taxes, not even as part of a larger environmental tax reform from which, overall, they even benefit.Footnote 44 In part, it may also play a role that people appear to maybe miss – or perceive as unimportantFootnote 45 – that the primary idea of these so-called Pigouvian taxesFootnote 46 is to influence behaviour and not to raise revenue.Footnote 47 People appear to care, too, about distributional issues attached to environmental taxes and how the revenue is spent.Footnote 48 Whatever the exact reasons, the fact remains that, on numerous occasions, it was stark political opposition that led to environmental taxes not being introduced even though they would have led to welfare gains.Footnote 49 As such, it does not appear to be easy for the EU to significantly increase the carbon price, particularly not in the short run when considering the current challenging economic and geopolitical environment.
With regard to spending, there is a wide range of EU instruments already in use. The multiannual EU budget (2021–7) foresees almost EUR 580 billion in climate-related spending,Footnote 50 which includes EUR 200 billion that are to be provided via the Resilience and Resolution Facility (RFF)Footnote 51 and EUR 92 billion via the Cohesion Fund and the Regional Development Fund.Footnote 52 Among the budget financed climate-related initiatives, important EU climate-related spending is organised via the Horizon Europe programme, which is attributing for 2021–7 approximately EUR 28.6 billion to climate-related research and innovation.Footnote 53 Furthermore, the EUR 5.5 billion LIFE programme funds projects covering nature and biodiversity, circular economy and quality of life, climate change mitigation and adaptation, and clean energy transition.Footnote 54 Moreover, the Just Transition Mechanism includes a EUR 19.32 billion Just Transition Fund that is financed through the budget (EUR 8.45 billion) and the NextGenerationEU (NGEU) (EUR 10.87 billion).Footnote 55 Apart from that, the Just Transition Mechanism includes the InvestEU ‘Just Transition’ scheme, which will provide a budgetary guarantee under the InvestEU programme expected to mobilise EUR 10–15 billion in mostly private sector investments,Footnote 56 and a Public Sector Loan Facility that combines EUR 1.5 billion of grants financed from the EU budget with EUR 10 billion of loans from the European Investment Bank (EIB), aiming to mobilise EUR 18.5 billion of public investment.Footnote 57
In addition, there are three funds that are funded through the ETS. First, the Innovation Fund,Footnote 58 which, at a carbon price of EUR 75 /tCO2, will between 2020 and 2030 contribute around EUR 40 billion to the development of innovative low-carbon technologies. The fund awards grants through calls for proposals and through competitive bidding procedures.Footnote 59 Second, the Modernisation Fund,Footnote 60 which, with the same underlying carbon price, will between 2021 and 2030 provide for EUR 48 billion to support the modernisation of energy systems and the improvement of energy efficiency in 13 lower-income EU Member States.Footnote 61 Here the applications are made via the beneficiary Member States, after which the proposal is evaluated by the EIB and – in case the investment does not fall into a priority area of the fund – also by a dedicated Investment Committee.Footnote 62 Third, the Social Climate FundFootnote 63 is to provide Member States with dedicated funding to support people and businesses that are most affected by the new ETS 2 system.Footnote 64 It will pool revenues from the auctioning of allowances from the ETS 2 as well as 50 million allowances from the existing EU ETS and demand that Member States provide a mandatory 25 per cent contribution. Over the 2026–32 period, this should raise at least EUR 86.7 billion.
Although the above numbers appear rather impressive, they are not enough. As mentioned, merely to safeguard reaching the Fit for 55 goals requires a yearly additional green investment of around EUR 520 billion per year until 2030.Footnote 65 The investment needs are different among different sectors (higher needs in the transport sector as well as in the residential and tertiary sector)Footnote 66 and different countries (higher needs in Central and Eastern European countries).Footnote 67 Importantly, this investment gap is to be closed by both the private as well as the public sector. While it is generally the private sector that will have to bear the larger share,Footnote 68 the situation is the opposite in some Member States.Footnote 69 Public investments can be direct and indirect through co-investments with the private sector or state guarantees.Footnote 70
The FINE-for-EU initiative contributes to two of the above policy areas. First, and most relevantly, it adds to an already existing arsenal of climate spending instruments via promoting the so far still under-represented funding of pan-European green investment projects. Second, in so doing, it will be designed to set various incentives and disincentives that should contribute to behavioural changes. Thus, while it is not a carbon tax as such, it should have, at least to a minor extent, similar effects.
B. The financing architecture of the EU: the juste retour problem
The EU budget is financed via so-called own resources and other revenues. The latter, comprising one-third of EU revenues, includes funds that arise in the course of the implementation or enforcement of EU policiesFootnote 71 as well as the revenues from borrowing activities linked to the non-repayable part of the NGEU.Footnote 72 The former, constituting two-thirds of EU revenue,Footnote 73 is money attributed from the Member States to the EU via the so-called own resource decision. This mechanism is based on Article 311 of the TFEU pursuant to which the Council unanimously agrees on the financing of the EU after which national parliaments have to ratify it.Footnote 74 Typically, this process is renewed every seven yearsFootnote 75 with the current own resource decision being valid from 2021 onwards. So far,Footnote 76 it is based on four pillars.Footnote 77 The first one concerns traditional own resources that are customs and agricultural duties.Footnote 78 With the legislative and revenue competence being at the level of the EU, these traditional own resources are factually like an EU tax, although the administrationFootnote 79 is left to the Member States that get rewarded by being allowed to keep 25 per cent of the collection costs.Footnote 80 The second pillar is constituted by value-added tax (VAT)–based own resources that, following a certain mechanism related to Member States’ VAT base, allocate funds to the EU.Footnote 81 This VAT-based own resource is paid from the Member States’ general budget, but here the underlying rules are subject to far-reaching harmonisation.Footnote 82 Third, the new own resource decision introduced a so-called plastic levy pursuant to which Member States must pay the Union EUR 0.80 per kilogram of non-recycled plastic waste.Footnote 83 While Member States can implement a plastic tax, and some have done this,Footnote 84 it is paid out of their general budget.Footnote 85 The fourth pillar is the so-called gross national income (GNI)–based own resources.Footnote 86 These are, by far, most relevant (in 2020, their share of overall revenues was 71.9 per cent) and serve as a residual revenue source.Footnote 87
Importantly, the EU cannot raise money through borrowing unless there is explicit authorisation such as in Article 5 of the current own resource decision with respect to the European Recovery Instrument.Footnote 88 Furthermore, the EU cannot directly levy taxes with a fiscal character as there is no legal basis for this in the TFEU.Footnote 89 Rather, there must be intermediation via the Member States that levy the tax – as the case may be, on the basis of harmonised rules – and then pass the money on to the EU via their own resource decision.Footnote 90
The spending of EU funds is guided by a long-term plan – the so-called Multiannual Financial Framework (MFF). It sets out the EU’s spending priorities and limits. The current MFF extends from 2021 to 2027 and includes spending of EUR 1.211 trillion.Footnote 91 This is combined with the temporary recovery instrument, the NGEU, including EUR 806.9 billion.Footnote 92 While these numbers are high in absolute terms, relatively they are not. Rather, the annual EU budget roughly corresponds to the budget of Denmark.Footnote 93
Although decision-making on budgetary matters is shared between the Council and the European Parliament, it is factually the Council that has considerably more power in this regard.Footnote 94 This is because, under Article 312 of the TFEU, the Council sets out the MFF after which the European Parliament can agree or disagree. Although that gives the latter veto power, the agenda-setting remains with the Council.Footnote 95 The yearly budgetary negotiations that happen based on a Commission proposal between the Council and the European Parliament then need to stay within the limits set by the MFF.
With EU financing relying heavily on GNI-based own resources and the Council being able to set the agenda in spending, Member States have shown tendencies to think about the EU budget in terms of net balances – a well-known problem referred to as the juste retour dilemma.Footnote 96 This matters because it incentivises Member States to aim for a minimisation of their national contributions and a maximisation of their measurable flowbacks from the EU budget.Footnote 97 Ultimately, this phenomenon is responsible for (i) an under-provision of genuine EU-level public goods that lack visible benefits from the perspective of the Member States and (ii) an over-provision of EU-funded projects in the fields of agriculture and cohesion policy that have only a very limited additional EU value but contain certain and clearly quantifiable backflows to the Member States.Footnote 98
This juste retour thinking is problematic for the endeavour of our model. When the goal is to maximise promoting achievement of the Fit for 55 goals, what primarily counts is maximisation of the impact of every euro spent towards reaching this objective. The question of how these investments are distributed among Member States should be of secondary relevance and matter only to the extent that the policies at stake are equally effective. This means that, if the result is that most of the pan-European investments funded by the FINE-for-EU mechanism are concentrated in certain regions, this would have to be accepted as a consequence of striving for optimisation. Distributional concerns, while not invalid as such, should not compromise the effectiveness of the model in terms of fighting climate change. To ensure this outcome and to escape the forces of net balance thinking, we suggest structuring the model outside the EU budget. Later, we will demonstrate how this can work.
III. The Fine-for-EU model
A. The legal precedent: The Single Resolution Fund
The aim of raising a particular amount of money that is to be spent for certain predefined purposes outside the EU budget is not new to EU law. Rather, in 2014, the SRF was established. Based on calculations by the Single Resolution Board (SRB),Footnote 99 it was determined that banks of participating Member States need to pay an annual contribution to the building up of the SRF.Footnote 100 This levy is collected by national resolution agencies and transferred to the fund.Footnote 101 The money in the SRF can, upon the decision of the SRB and with various conditions and limitations, be used in the process of the resolution of banks in participating Member States.Footnote 102 The legal basis for this regulation is Article 114 of the TFEU on foreseeing the ordinary legislative procedure. This is particularly interesting as the levy applies with respect not to banks in the whole EU but only to banking union countries.Footnote 103 As the money is earmarked for a specific purpose, it never reaches the EU budget, neither as an own resource nor as other revenue. In this context, the characteristic of the payments as an insurance fee also plays a role because it gives the system a closed character; banks pay based on the risk they impose on society and, as a result, the whole sector – and society as a whole – benefits from the payments this fund makes when the risk materialises somewhere.
We propose to build up a Pan-European Climate Fund, based on Article 192(1) of the TFEU, that is similar to the SRF in structure and purpose. The Pan-European Climate Fund would be financed by ‘climate contributions’ charged to a predefined set of payers. The amount of each contribution would be calculated on a regular basis by the Pan-European Climate Fund Board that would also own and manage the fund. The members of the Pan-European Climate Fund Board would have to be appointed by the European Parliament.Footnote 104 The fund would be obligated to spend the money on pan-European green investments, as determined by the Pan-European Climate Fund Board. The latter should be equipped with the relevant Member State independent expertise to determine this. In choosing the investments, the Pan-European Climate Fund Board should be legally obliged to strive for spending to maximise promotion of the Fit for 55 goals. Distributional aspects may be considered, but are declared to be of secondary relevance. This means that if an investment with the overall highest marginal benefit can be effected in more than one region, the per capita value of Pan-European Climate Fund expenditure provided for the respective regions is to be taken into account, with the aim of striving for an equal distribution of the investments. The spending decisions must be transparent and well-reasoned, which would be audited by the European Court of Auditors. Furthermore, the Pan-European Climate Fund Board must report to the European Parliament on a yearly basis. Similar to the SRF, the funds would be earmarked and thus not be included in the general EU budget. As with the SRF, the payments to the Pan-European Climate Fund would also have some sort of social insurance character if, as we will also suggest, the payments made to the fund are linked to contributors’ emissions and, as immanent in the model, the money is spent on policies and projects that help reduce emissions. To whom this climate contribution is to be charged and on what basis will be discussed in Sections III.B–III.C.
B. The scope: who has to pay?
When the overarching goal of the model is the collection of money to help achieve the Fit for 55 goals through the provision of additional climate-related pan-European public goods without having primary regard to the distributional effects on Member States, much speaks in favour of financing the measure to have a pan-European structure as well. It would, in other words, not appear feasible to aim for charging the climate contribution to those sectors that benefit from the spending. Neither would it appear wise to distribute the financing burden among Member States based on their relative wealth. Rather, it should be those that generally benefit from economic freedoms and the possibility to engage in pan-European business that should be called upon to pay the climate contribution. This way, pan-European economic actors take responsibility for pan-European policy.
To be clear, this requires a fair bit of approximation to be workable. Ultimately, the idea of the internal market is to promote the possibilities for everyone, that is, individuals, small and medium-sized enterprises (SMEs), and MNEs, to become economically active across the borders. Nonetheless, it is reasonable to say that it is particularly MNEs that have been reaping the benefits of economic freedom.Footnote 105 In doing so, they have given rise to significant emissions – both directly as a result of their business operations and indirectly in various ways, for example through lobbying activities for softer regulatory policies.Footnote 106 In fact, 60 per cent of total industrial emissions are caused by only 157 large MNES.Footnote 107 This significantly outweighs their global share in economic output.Footnote 108 Furthermore, in 2022 MNEs invested USD 5 trillion in activities that are harmful to nature, which is a staggering 140 times larger than private sector investments into nature-based solutions.Footnote 109
Apart from that, focusing on MNEs as the main contributors to the Pan-European Climate Fund could be attractive for the reason that it would potentially increase the progressivity of the climate policy as a whole. What underlies this effect is the so-called incidence of the measure, which, in simpler terms, describes who is worse off as a result of the payment obligations. While, formally, the corporation pays taxes and other contributions, it is ultimately always an individual that bears the burden of the payments. Shareholders, workers, or suppliers may receive less money from and consumers may pay more money to the corporation as a result of the obligation. The question of who bears the incidence has been subject to extensive research in the field of corporate taxation, with the result being that it ultimately depends on a variety of factors.Footnote 110 However, when the climate contribution is levied on a corporation that earns economic rents, it should typically be the shareholdersFootnote 111 and, in the presence of rent sharing with workers, also the latter that bear the incidence.Footnote 112 When assuming, in line with the literature, that shareholders tend to be more affluentFootnote 113 and having regard to the observation that rents are disproportionally shared with high-income workers,Footnote 114 a contribution targeting rent-earning corporations could have an overall progressive effect. While this is a far-reaching generalisation, it is fair to assume that MNEs often earn economic rents.Footnote 115 This implies that focusing the model on MNEs could give it a progressive character.Footnote 116 If our assumptions hold, the result would be remarkable because both the effects of climate changeFootnote 117 and, typically, environmental taxes tend to be regressive.Footnote 118 Breaking through this logic by introducing a measure that increases progressivity in the system and decreases the regressive consequences of climate change would be very appealing.
This could ultimately give rise to a rather powerful political narrative and conceptual justification. On the one hand, as mentioned, MNEs have been causing significant emissions. On the other hand, however, one may argue that MNES do not contribute enough to address the problem. As emphasised by the World Bank (2023), the 157 large MNEs referred to earlier show insufficient commitment to decarbonising production and supply chains.Footnote 119 In addition, MNEs have been reacting to and exploiting the weaknesses of the tax system.Footnote 120 Their setting up of inefficient tax-driven structures has been giving rise to welfare lossesFootnote 121 and has partly put pressure on the immobile tax base to make up for the forgone public revenue that is needed, inter alia, to address climate change and its consequences.Footnote 122 These numbers are substantial: As estimated by Tørsløv et al (2023),Footnote 123 in 2015, globally, MNEs shifted 36 per cent of their profits to tax havens. In absolute terms and using 2019 data, this concerns about USD 1 trillion.Footnote 124 High-profile cases, such as the infamous tax of 0.005 per cent that Apple Inc. recorded on its European profits in 2014,Footnote 125 have created public outcry on the unfairness of the international tax system. Although, in reaction thereto, an overhaul of the international tax regime has taken place since the aftermath of the 2008 financial crisis,Footnote 126 it remains the case that the ultimate extent of the reforms is rather incremental. Neither the OECD Base Erosion and Profit Shifting ProjectFootnote 127 nor the more far-reaching international commitment to implement – or accept the implementation of – a minimum taxation regime for large MNEsFootnote 128 fully addresses the shortcomings of the current international tax system. As long as the group entities of an MNE are treated as separate taxpayers and taxed under the various national tax systems, there will be an incentive for MNEs to shift activities and profits and for states to compete for them.Footnote 129 More fundamental proposals to overcome the weaknesses of the international tax system that have been presented in the literature are not at reach.Footnote 130 Against this background, a direct contribution by MNEs to the fight against climate change is well justified, and there is a chance that individuals will perceive it as such. In fact, aside from the national governments (63 per cent), it is the EU (57 per cent) as well as businesses and industry (58 per cent) that people regard as being in charge of addressing climate change.Footnote 131 Thus, action to this end would respond to a public callFootnote 132 that would likely promote the social legitimation of the EU as a whole as well as, optimally, a social cohesion.Footnote 133
A decision to focus the model on MNEs goes hand in hand with various follow-up questions on the precise determination of the scope. To begin with, the territorial scope must be established. In this regard, there are two possibilities. On the one hand, the rules could target genuine EU MNEs, that is, MNEs with their headquarters in the EU. This would be a very narrow scope, however, and would, on top of that, incorporate the risk that some MNEs escape the rules by shifting their headquarters outside the EU. On the other hand, it would be possible to target the mechanism on all MNEs that have a qualified level of presence or activity in the EU. This is, we think, the better option. In this respect, one may be concerned about the enforceability of the rules because, when there are only a few assets in the EU, there may not be enough to be seized in the event of non-payment. However, it is possible to use turnover as a (additional) basis for enforcement measures. The infrastructure and resources for this are available since customs authorities in the Member States have the information on sales in the EU.Footnote 134
Furthermore, it must be determined whether a size threshold is to be introduced. This has the advantage of making the system easier to administer and ensures, from the outset, that it will mostly be economic rent-earning MNEs that are in scope. A value that is frequently used in international taxation for the purpose of targeting what may be called global firms is a global revenue threshold of EUR 750 million on a consolidated basis.Footnote 135 If setting such a threshold is desired, it would, for the sake of simplification, be feasible to bind the scope of the measure to rules that are already existing. In particular, the obligations of certain large groups to provide public country-by-country reporting could be an interesting starting point for determining the scope of the climate contribution if the intention is to apply the rules to large MNEs that have a qualified presence in the EU.Footnote 136 According to the Commission, approximately 6,000 MNEs fulfil the criteria, out of which approximately 2,000 are headquartered in the EU.Footnote 137 If, instead, no size threshold is used and an MNE is defined ‘as an enterprise group that operates in at least two countries, with one of these being in the EU or EFTA’,Footnote 138 it will, based on 2021 data, be 155,983 MNEs that the measure will target.Footnote 139
C. The base and distribution of the climate contribution
Having determined the scope of the measure, the next step is to calculate the base and the mechanism to use to distribute the payment obligations of the climate contribution among those MNEs in the scope of the rules. In this regard it is, to begin with, important to recall that the model’s purpose is to raise funds to decrease the gap in green investments by funding additional pan-European environmental projects, for the sake of advancing the achievement of the Fit for 55 goals. This requires reaching a certain revenue target that should be the starting point for calculation of the payment obligations. Similar to the context of the SRF, we suggest that the Pan-European Climate Fund Board calculates the yearly contributions based on a predefined procedure.
While the exact methodology for calculating the contributions is not within the scope of this article, we provide structural remarks on the steps and factors that should be of influence so as to ensure that the model sets certain incentives and disincentives. In addition, we attempt to provide for some rough and illustrative quantification.
The starting point should be the overall investment need for reaching the Fit for 55 goals. For this purpose – and noting that we do not have information on the parameters used in the context of making this approximation – we use the estimate that was relied on in a recent publication of the European Central Bank (2023),Footnote 140 that is, a yearly additional need for green investment of EUR 520 billion. Thereupon, three further refinements are to be made to arrive at a basis that forms the ground for distributing the climate contributions among the MNEs in scope.
First, it is necessary to multiply this number by a percentage that represents the share of public investment that needs to be made to ensure achievement of the Fit for 55 goals.Footnote 141 Merely for the sake of argument, say that the share of required additional public green investment lies at 45 per cent.Footnote 142 This would be the first factor with which the above-mentioned base is to be multiplied. If we use EUR 520 billion, this would amount to EUR 234 billion of required public investment.
Second, an estimate needs to be made as to how much of this share is to be borne through investment in pan-European climate-related projects. In this regard, an expert opinion is needed. This could be provided through the European Environmental Agency, based on which the Pan-European Climate Fund Board, potentially in collaboration with the European Parliament, sets the yearly funding goal for pan-European climate-related investments. This includes the yearly funds that are necessary both to continue the investments that are already effected and to implement new investment projects. Say, for the sake of illustration, that this amounts to 30 per cent of total public spending needs.
Third, this basis is to be multiplied by a factor that represents the share of the worldwide emissions that the in-scope MNEs have of total global emissions. Using global instead of European numbers slightly prevents carbon leakage as it means that the MNE sector as a whole would not be able to diminish this share by shifting production out of Europe. This factor, of course, depends strongly on whether approximately 6,000 or 150,000 MNE groups are in scope. When the literature – without applying a size threshold – refers to MNEs’ share of global emissions being around 18 per cent,Footnote 143 we will calculate with 15 per cent as the share to be used when a broader group of MNEs is to be targeted and 5 per cent as the share to be used when a narrower scope is in focus.
This results in a base for distribution of EUR 3.5 billion (narrow scenario) and EUR 10.7 billion (broad scenario). If these numbers are considered too little (large), it is relatively easy to change them by deciding to provide for a larger (smaller) share of pan-European climate investments. This would increase the second factor (here being 30 per cent) and, as a result, the basis for distribution. Importantly, the third factor, that is, MNEs’ share of worldwide emissions, should not be manipulated as this would affect the incentive structure of the model.
Based on these estimates, in the narrow scenario with approximately 6,000 MNEs in scope, each MNE would, prima facie, have to pay about EUR 585,000 for the year in question. In the broad scenario with approximately 150,000 MNEs in scope, the yearly contribution would amount to about EUR 67,000 per group. These numbers need two further modifications. First, the precise allocation of yearly payment obligations is to happen via a formula that reflects the values that the whole model stands for, that is, pan-European business taking adequate responsibility for promotion of the Fit for 55 goals through financing pan-European investment. As such, the distribution mechanism should include parameters on size (reflected by profits and turnover), tax aggressiveness (reflected by a suitable value measuring this), and pollution (reflected by absolute emissions and the relative developments of emissions). Ultimately, larger, more tax-aggressive, and more polluting MNEs should pay more. Second, it must be ensured that the levy is not disproportionate. This is particularly relevant in the broad scenario as the definition of an MNE as a group operating in at least two countriesFootnote 144 can obviously include rather small businesses as well. They may have literally nothing to do with profit shifting, they may not earn economic rents, and they may even be loss-making. Thus, the attributes of size and minimum profitability are important and also serve towards reducing the required climate contribution to zero, if necessary. This ensures that only economic rents are captured and, furthermore, relates the payment obligation to the group’s actual ability to pay. Importantly, this is also a legal requirement.Footnote 145
D. Considerations on the incentives set by the model
As outlined so far, the model to create the Pan-European Climate Fund consists of four parameters: (i) public investment needs for closing the green investment gap; (ii) the desired level of pan-European green investment; (iii) the share of global emissions that is to be allocated to the MNEs in scope, which forms the basis of the calculation of (iv) the respective shares allocated to the individual MNE groups that need to pay. In this regard, various considerations with respect to the incentive structure of the model are on point.
The connection of the model to the overall investment needs that are required to achieve the Fit for 55 goals sets an important general incentive for MNEs in scope to improve their own environmental performance, as well as, maybe more crucially, to lobby for and not against stronger climate policies of Members States and the EU. This comes as a successful climate policy will reduce the overall green investment needs and thereby also the share to be carried by MNEs through contributions made to the Pan-European Climate Fund.Footnote 146 We perceive this to be one of the main arguments that speak in favour of adopting the model because when MNEs lobby in favour of instead of against stricter climate policies, this might have a substantial effect.Footnote 147
Furthermore, with the allocable share of overall emissions of the MNEs in scope being relevant, there is a common incentive for the covered businesses to decrease this share. This could motivate MNEs to engage in cross-sectoral cooperation, which has been regarded as a key factor in promoting sustainability.Footnote 148 This incentive could even be strengthened by providing businesses with premiums for reaching preset goals.
Apart from these macro-incentives, the model would also be able to affect the behaviour of the single MNEs in scope. The connection of an MNE’s contributions to its environmental performance may have a positive steering effect on a micro level. In this regard, a decision can be made between (i) using absolute values (demanding that those that, overall, pollute more and are more tax-aggressive pay more) or (ii) focusing on environmental performance relative to the overall sector (with those polluting more than the industry average being obliged to contribute more than those who pollute less). Whether tax-aggressiveness is – as we propose – taken into account or not is not a decisive element and can be renounced or replaced by another factor if so wished. Yet, a relationship to turnover and profitability will remain necessary as there is a need to avoid disproportionate outcomes.
In addition, we suggest considering giving paying MNEs a say in how the money is spent. This does not mean that they should be able to decide on this alone. Rather, this would happen by the Pan-European Climate Fund Board striving to maximise the marginal benefit that can be achieved by the funding. Nonetheless, it could be beneficial to give MNEs a voice in this respect. For instance, the Pan-European Climate Fund Board may narrow down the projects that can be considered for financing, among which MNEs can choose.Footnote 149 Likewise, when feasible, MNEs can be given the opportunity to provide for contributions in kind. The rationale behind this inclusion of MNEs into the process is, on the one hand, a notion of empowerment steered towards increasing acceptance by MNEs. On the other hand, it could allow the MNEs to reap the goodwill created through the payment as part of their environmental, social and governance (ESG) strategy. For sure, MNEs would act out of a legal obligation. Yet, it is not a novelty for legislators to impose by law corporate social responsibility duties on MNEs.Footnote 150 At the core is, ultimately, a phenomenon that is well expressed in the literature: MNEs can and should be natural partners for governments in achieving a green transition.Footnote 151
IV. The legal basis
The Pan-European Climate Fund would promote achievement of the goals outlined in Article 191 of the TFEU.Footnote 152 Thus, the legal basis for this Climate Fund would be in Article 192 of the TFEU.Footnote 153 The crucial question in this regard is whether the measure, in its aim and content, is primarily of a fiscal nature.Footnote 154 If it is, it would fall under Article 192(2)(a) of the TFEU. This would mean that, as usual in the field of tax law, the special legislative procedure applies. It would then need unanimity in the Council for the proposal to get accepted.Footnote 155 If, on the other hand, the measure is not considered to be primarily of a fiscal nature, it would fall under Article 192(1) of the TFEU. This, in turn, would go hand in hand with the ordinary legislative procedure being applicable.Footnote 156 As such, this question is of utmost relevance with regard to the implementability of the measure, given that getting unanimity in the Council has proven to be much more difficult to achieve than reaching a decision based on the ordinary legislative procedure.Footnote 157
The term ‘primarily of a fiscal nature’ lacks a precise definition and is interpreted rather differently.Footnote 158 This concerns, first, the notion of ‘fiscal nature’. Some have attached a rather wide meaning to it towards extending the concept to taxes, fees, and charges.Footnote 159 Following this understanding, arguably the climate contribution to be paid to the Pan-European Climate Fund would also count as a measure of a fiscal nature. Others, instead, provide for a more differentiated view and regard only proper taxes as falling under the scope of the provision.Footnote 160 Under this view – which is implicitly supported by the fact that the ETSFootnote 161 and CBAMFootnote 162 are also based on Article 192(1) of the TFEU – the climate contribution would not be classified as being of a fiscal nature. This comes as the climate contribution, through its character as an insurance payment and the fact that it is earmarked, should not count as a tax.Footnote 163
The term ‘primarily’, again, qualifies the balance that is to be struck between environmental and fiscal objectives. Convincingly, this has been interpreted towards imposing a centre of gravity test, meaning that if the budgetary goal is not the primary purpose, but only a side effect of the policy, at stake is not a measure of primarily fiscal nature.Footnote 164 Based on this, environmental taxes would not be covered by Article 192(2)(a) of the TFEU, as they primarily mean to steer behaviour. However, taxes related to the environment would be covered, if they are mainly meant to raise revenue.Footnote 165
In the context of the Pan-European Climate Fund, this is rather difficult to distinguish because the Pan-European Climate Fund is primarily meant to raise revenues. In fact, it has been argued that parafiscal levies that, as in our model, give rise to substantial revenues are of a predominantly fiscal nature if the size of the revenues that are, owing to the measure, missing from the public budget are of a notable extent. It is even climate measures that should finance a fund that are named as examples in this regard.Footnote 166 On the other hand, however, it must be emphasised that the climate contribution payments are earmarked to finance expenditure-side environmental policy that without such a mechanism could not be executed. In other words, the Pan-European Climate Fund is intrinsically linked to the policies it is financing because the latter would not, to a comparable extent, be possible without it. As such, the Pan-European Climate Fund constitutes an additional and temporary measure that would help to fulfil an urgent need, namely, an increase in green funding to meet a legally binding goal,Footnote 167 and would not aim to give the state additional financial leeway.Footnote 168 Neither would the measure interfere with the general budget, since a payment going to the Pan-European Climate Fund would not, in the absence of the latter, have gone to the general budget. Rather, it would not have been paid. This is relevant because – as correctly argued in the literatureFootnote 169 – the ultimate objective of Article 192(2)(a) of the TFEU lies in the protection of Member States’ budgetary integrity, which is not at stake here.Footnote 170
Furthermore, as worked out in Section III.D, the Pan-European Climate Fund also sets incentives that can steer behaviour. While the connection between taking a socially harmful action and triggering the tax is not as linear as in the case of environmental taxes,Footnote 171 the Pan-European Climate Fund can, as outlined already, be structured towards affecting the private marginal costs of economic actors dependent on the person having to make the payment showing desired and/or undesired behaviour.Footnote 172 Although this is more of a second-order effect that comes along with the primary goal of financing and executing green spending, it is a further aspect that speaks against the EU Climate Fund having a primarily fiscal character.
Lastly, it needs to be stressed that the SRF is also based on Article 114 of the TFEU.Footnote 173 The carve-out provision of Article 114(2) TFEU that denies the application of Article 114 TFEU for fiscal measures does not apply here. Also in the context of the SRF, the national budgets are not interfered with. Rather, the SRF is built up to protect the integrity of national budgets in the event that there is a need for intervention to protect society from the large costs caused by bank failure.Footnote 174 This mechanism of relying on earmarked insurance-like payments has inspired the architecture of the Pan-European Climate Fund, which serves as an additional argument that, mutatis mutandis, speaks in favour of Article 192(1) TFEU being the relevant legal basis for the measure.
V. The relationship to other climate-related instruments
In this section, we aim to discuss how the FINE-for-EU mechanism relates to other climate-related financing instruments. To start with, we should focus on environmental taxes and levies that aim at internalising the social cost of behaviour into the actor’s private cost function. These so-called Pigouvian taxesFootnote 175 are a very powerful toolFootnote 176 that can reach a double dividend of reducing pollution and raising revenue that can reduce more distortive taxation.Footnote 177 To achieve the Fit for 55 goals, an increase in the carbon price is needed, as mentioned earlier.Footnote 178 As such, environmental taxes and levies are an important complementary policy to the green investment that the Pan-European Climate Fund should finance, since they make polluting more costly and upon succeeding in decreasing emissions, will also reduce the overall required green spending needs.Footnote 179 In doing so, they will also raise some revenue that will accrue to the national budgets and, thus, help in financing national public green investment. The ETS, for instance, raised about EUR 14.4 billion in 2020Footnote 180 and EUR 31 billion in 2021.Footnote 181 Against the background of the typically stark political resistance against environmental taxes and levies, we do not expect a significant increase in the short run.Footnote 182 We note, however, that if we are wrong then this may have an effect on the overall green investment needed, since the pollution may decrease more strongly than was assumed by those estimating the current additional green investment needs.
Furthermore, additional green investment may be financed through taking out additional debt. Different approaches as to how the EU fiscal rules could be adopted towards better accommodating such debt-financed public green investment have been discussed by Pekanov and Schratzenstaller (2023).Footnote 183 What is particularly interesting is their proposal of an ‘EU Climate Fund’ as a vehicle – following the example of the EU Recovery and Resilience Facility (RRF) – to take out common debt at an EU level, which Member States can then apply for to finance public green investment.Footnote 184 Conceptually similar ideas have been expressed by Garicano (2022), who proposes a European Climate Investment Facility (ECIF) and an independent European Fiscal Agency to assess the good standing of Member States to access this new facility.Footnote 185 Under his proposal, the ECIF should provide grants and loans worth EUR 57 billion on average to Member States. Similarly to the proposal of Pekanov and Schratzenstaller (2023),Footnote 186 there should be no direct transfers to Member States, but the benefit would lie in enabling borrowing with a lower interest rate.Footnote 187 A third and slightly different proposal was made by the IMF (2022), which suggests introducing an EU Fiscal Capacity that should, among other things, finance green public investment through a debt-funded Climate Investment Fund.Footnote 188 We understand that under this initiative transfers to the Member States could be granted.Footnote 189 A fourth proposal was made by ECB staff members Abraham, O’Connell, and Oleaga (2023), who suggest setting up an EU Climate and Energy Security Fund that could provide EUR 500 billion by 2030.Footnote 190 The legal design of this is drawing from the NGEU fund, with money being borrowed on the basis of Article 311 of the TFEU.Footnote 191 Repayment is to happen via additional new own resources or, to the extent that this does not succeed, GNI-based own resources.Footnote 192
The above-mentioned models, obviously, differ from the Pan-European Climate Fund proposed in this article, as they foresee debt-financed investment and, at least to some extent, repayment through the Member States’ budgets. This may not be easy politically. As Pekanov and Schratzenstaller (2023) also explicitly underline, in the current insecure economic and political setting, debt-financed green investment ‘may incur considerable future costs for public budgets and may thus be problematic from the perspective of fiscal sustainability’,Footnote 193 should the trend towards rising long-term interest rates continue.Footnote 194 However, it seems that such debt-funded climate facilities will have to play a role – and we hope that our model can take away some pressure of future generations to repay the debt. After all, we have already sufficiently managed to make their lives much harder.
VI. Conclusion
When urgent and extraordinarily high funding needs are to be met, it calls for maximum efforts on any level. This also includes the much-demanded increase in climate-related European public goods. The money needed for this will likely have to be partly debt-financed, and proposals to this end have been brought forward in the literature. Yet, in the current uncertain economic and geopolitical situation, it may be difficult to take out debt of such a substantial extent. To decrease the amount of money that needs to be raised otherwise, and as a means to further support the endeavours of increasing climate-related European public goods, we developed the FINE-for-EU mechanism, which consists of a Pan-European Climate Fund and a Pan-European Climate Board. Inspired by the SRF that is relied on to insure society against the risks of bank failure, the Pan-European Climate Fund aims to establish a link between cross-border business and the emissions this is giving rise to. This way pan-European policies are funded by pan-European actors that benefit from the EU’s legal framework promoting such business.
Demanding that cross-border businesses take responsibility is, not least, conceptually justified by their being prone to aim at escaping their obligations. In fact, the literature points out that MNEs are still heavily involved in profit shifting to tax havens.Footnote 195 For sure, there are differences in how businesses behave. Our model takes this into account, on both a micro and a macro level, and therewith incentivises each covered MNE, as well as the corporate sector as a whole, to act more sustainably. In addition, the Pan-European Climate Fund empowers MNEs and gives them a say in how the funds are to be spent. Furthermore, like private citizens, MNEs are potential or even actual victims of natural events caused by climate change;Footnote 196 they therefore have a direct interest in participating in investments today that will minimise future risks and damages. This allows the model to more strongly align public and private interest and, although primarily aimed at ensuring a desired level of green investments, create favourable secondary steering effects.Footnote 197
Having in mind the goals and set-up of the Pan-European Climate Fund, we consider that the better arguments speak in favour of Article 192(1) of the TFEU serving as a legal basis for the measure. Thus, the ordinary legislative procedure is applicable, enabling co-decision-making by the Council and the European Parliament and demanding qualified majority, instead of unanimity.Footnote 198
We live in extraordinary times; it will only be through extraordinary, that is, unconventional means that we will be able to solve the challenges that lie ahead. With the Pan-European Climate Fund, we introduce a simple, yet powerful model that involves MNEs in raising substantial amounts of money in a rather short time.
Acknowledgements
The authors thank Bianca Beyer for her comments. Furthermore, we thank Caroline Heber, Aitor Navarro, Johanna Stark, Andrés Báez Moreno, Stefanie Geringer, Lorenz Jarass, Gianluigi Bizioli, Ricardo García, Christian Neumeier, Till Meickmann, Fabian Kratzlmeier, Jakob Dürr, and Kristof Boel for insightful comments and feedback. All remaining errors are ours.
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